Investing your money is a great way to grow wealth. But the idea of investing might seem daunting if you're totally new to it and don't know much about it.
A recent survey by FinanceBuzz found that almost 30% of Americans have yet to start investing. And among those who haven't gotten the ball rolling, 40% point to not knowing enough about investing as the reason.
If you feel fairly clueless as an investor, don't sweat it. Here's how you can get started as you work to grow your knowledge.
You may have heard of the S&P 500, but if you're unsure exactly what it is, don't sweat it. The S&P 500 is an index that consists of the 500 largest companies that trade publicly today. When news reporters say things like, "The stock market was down today," they're often referring to the S&P 500 index, since it's generally used as a benchmark for the entire market.
Exchange-traded funds (ETFs), meanwhile, are funds you can buy and sell the same way you'd buy shares of different companies. The nice thing about ETFs, though, is that they allow you to own a collection of stocks without having to go out and research each and every one.
Now, there are different types of ETFs you can invest in. A tech ETF, for example, will be loaded with different tech stocks. A healthcare ETF will consist of healthcare stocks.
An S&P 500 ETF will basically invest in the companies included in that index. And that's what makes this a good choice if you're first starting out.
Over the past 50 years, the S&P 500 has rewarded investors with an average annual 10% return. That return accounts for years when the index did well, as well as years when the index lost value.
Let's say you're ready to start investing and you have $2,000 to work with. If you were to buy shares of an S&P 500 ETF and hold them for 40 years, you'd grow your $2,000 into about $90,500, assuming that ETF gives you a 10% average annual return, too.
A big reason it's a good idea to start investing with S&P 500 ETFs is that it's essential to maintain a diversified portfolio at all times. And putting your money into 500 different companies achieves that goal.
However, there are individual stocks that have outperformed the S&P 500 index through the years and are likely to continue to do so. Once you have an established portfolio with S&P 500 ETFs, you can consider researching different stocks to see if there are specific ones it pays to put money into.
Now, there are certain things you'll want to look out for when choosing stocks. Pay attention to a given company's:
- Cash flow
You'll also want to consider what competitive advantage a given company has over similar businesses. Publicly traded companies are required to disclose certain financial information regularly. If you're willing to read through that information, you can make decisions for your portfolio.
As you add stocks individually, though, remember to uphold the principle of diversification. You don't, for example, want to simply keep buying tech stocks. Rather, you should aim to own stocks across a range of market sectors.
When you feel like you're in the dark about investing, it can be tricky to get started. But the sooner you do get started, the more time you'll give your money to grow. So if you have funds you don't need for near-term savings or specific goals, open a brokerage account and put that money to work.
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